USD/JPY recorded modest losses near 156.10 during the early Asian session on Monday. Traders are raising their bets that the US Federal Reserve (Fed) will cut interest rates again at its December policy meeting, weighing on the US dollar (USD) against the Japanese yen (JPY). Later Monday, Bank of Japan Governor Kazuo Ueda is scheduled to speak. The US ISM Manufacturing PMI report for November will also be published.
Weak US labor market data and dovish comments from Federal Reserve officials have fueled expectations of a rate cut in December. Fed funds futures traders now place a roughly 87% chance of a cut at the conclusion of the Fed’s Dec. 9-10 meeting, up from 71% odds a week ago, according to the CME FedWatch tool. Fed officials will enter a quiet period before the Fed meeting. Traders are waiting for the upcoming US economic data to gain new momentum.
The Japanese government plans to issue more new bonds to finance Prime Minister Sanae Takaishi’s economic package, Reuters reported on Thursday. Concerns about the supply of new government debt pushed long-term government bond yields to their highest levels in more than two decades earlier this month. This, in turn, could undermine the Japanese yen and create tailwinds for the pair.
Dovish comments from some BOJ policymakers, including Junko Koeda and Kazuyuki Masu, have raised expectations for a BOJ rate hike in December, which could help limit the yen’s losses. However, the Bank of Japan’s Ueda speech will be closely watched on Monday, as he may offer some hints about a rate hike at the Bank of Japan’s December meeting.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most widely traded currencies in the world. Their value is determined broadly by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the spread between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the powers of the Bank of Japan is to control the currency, so its movements are key to the yen. The Bank of Japan has intervened directly in currency markets on occasion, generally to devalue the yen, although it often refrains from doing so due to the political concerns of its major trading partners. The Bank of Japan’s ultra-loose monetary policy between 2013 and 2024 caused the yen to depreciate against its major counterparts due to the growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual dismantling of this ultra-lenient policy has given the yen some support.
Over the past decade, the Bank of Japan’s ultra-loose monetary policy stance has led to widening policy divergence with other central banks, especially the US Federal Reserve. This supported the widening of the spread between the US and Japanese 10-year bonds, which favored the US dollar against the Japanese yen. The Bank of Japan’s decision in 2024 to gradually abandon ultra-loose policy, along with interest rate cuts at other major central banks, are narrowing this spread.
The Japanese yen is often viewed as a safe investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency because of its supposed reliability and stability. Turbulent times are likely to strengthen the value of the yen against other currencies that are considered riskier to invest in.
